Shinichiro Ito, All Nippon Airways

Sinichiro Ito

BIG IN JAPAN

Talk to almost any one of All Nippon Airways’ 33,000 employees and their pride in the airline’s independence is evident.

Their company does not follow government guidelines – or need its hand-outs – just like, whisper it softly, big domestic rival Japan Airlines. In a quirk of fate, however, it is the state that has given ANA the opportunity to surpass JAL and become Japan’s – and possibly even Asia’s – number-one carrier.

JAL, teetering on the verge of bankruptcy again in 2010, went begging to the government. It received a bailout, but only after an outcry that turned public opinion to the point where the government forced JAL to shrink its network and cut its fleet to lower costs and attempt to return to profitability.

That has allowed ANA, an early member of Star Alliance, to catch up and, as its chief executive Shinichiro Ito points out, continue to be profitable and grow without government help. ANA, say observers, finally has a realistic chance to hit that number-one spot. “I’m not sure if JAL is a great competitor to compare ourselves against any more,” Ito says pithily.

“After the bankruptcy and troubles, ANA’s network is almost as big as JAL’s. But I must stress this – size alone does not do any good. You really have to be an organisation that can make profit. If you are big and you can’t make profit, it does not make any sense. We are already one of the big airlines in Asia.” State help for JAL still rankles Ito. For the past two years, he has made no secret of his opposition, although he chooses his words carefully.

“We have been consistent in our message that everything should be equal. The support should be given in a fair, equitable manner to maintain the network that the Japanese people need. The support shall be given only for that purpose. Whether that is on an equal footing or not, I would refrain from making any comment,” he says.

After a pause, Ito shrugs and points out that little can be done about the situation. ANA, he adds, will just continue to do it all on its own to be successful. “Talking about someone else doesn’t really help us. All we need to do is stand firm on our feet and to do whatever we need to, surely and steadily.

“Ever since ANA was established, from our very first step into this existence, we have been a private-sector company.

“That is very unlike JAL. That is a very big difference between us – and that difference is a source of pride. On that, we are very proud of ourselves.”

ANA’s aim, he says, is to continue to be profitable and return value to shareholders. That will be a major challenge

JAPANESE MARKET

After returning to profitability in 2010, with the global economic crisis resulting in the airline making a loss in 2009, there are plenty of headwinds once again to keep his management team busy.

Japan is only just recovering from the devastating earthquake and tsunami that hit the country in March. Outbound travel is returning, but inbound traffic is still slow. A rise in fuel prices and lower demand after the earthquake resulted in a fiscal first-quarter loss. Economic uncertainty in the USA and Europe continues to affect demand from two regions that account for a large chunk of ANA’s traffic.

These variables, Ito admits, could derail ANA’s plans. They do not, however, deter ANA from its strategies to create new revenue streams and restructure its operations. The airline, Ito says, cannot wait for a “positive environment”.

The airline will maintain focus on the premium brand and product to use as the basis of its growth in the international and domestic market. It hopes to use the opening up of Tokyo’s Haneda airport to international services to grow its network, particularly to the rest of Asia.

The liberalisation of Japan’s airline market will add new destinations in North America and Europe, where the Boeing 787s can be best utilised. It will also enable low-cost carriers to serve a new market segment. ANA appears to have a lot on its plate, but Ito says there is little choice.

“Honestly, the environment is not making us optimistic. JAL is starting to recover and the increased slot availability at Haneda and Narita means there is more competition. But we must have better service than our competitors so that Asian passengers will choose to fly with us. We must enhance our brand. We must keep doing many things.”

The government, Ito says, could help. Cumbersome partnership restrictions, aviation fuel taxes, and high airport, navigational and landing charges have all been obstacles for many years. Partnership regulations have been relaxed – partly because of the US-Japan Open Skies agreement – and some of the aviation fuel tax has been lowered.

However, the overall competitiveness of Japanese airlines remains much lower.

“ANA alone is paying 120 billion yen [$1.6 billion] in costs to the government. In fiscal 2009, we made a huge loss. If there was no such cost, we wouldn’t have been in red ink that year. Some of the newspapers calculated that if we were a Singaporean company, then we wouldn’t be suffering any loss over here. Our competitiveness, just because we are a Japanese airline company, has been hindered,” he points out. Political instability continues in Japan, with both ruling party and opposition unable to get the country out of an ongoing economic malaise – reflected in the moribund aviation policies. The government should understand the benefits of aviation and its contribution to economic growth, Ito says, adding that the Open Skies agreements, for example, should be made permanent and taxes reduced. “Civil aviation policy so far has been focused on building more airports. But the airports network has been completed, and therefore there is an environment now emerging to allow the ministry to reduce tax on airline companies.”

LAUNCHING THE 787

One frustration that cannot be attributed to the government is related to the Boeing 787, for which ANA is the launch customer. ANA knew Boeing was aiming to unveil a product that would transform the way aircraft are designed and manufactured, and was prepared for some hiccups along the way. However nobody, including Boeing, could have foretold the numerous challenges in the design and production phase that led to a three-year delay in its delivery schedules.

ANA had to get additional Boeing 767-300ERs as interim lift and cut back on some network growth while waiting for Boeing to sort out the troubles. It is now scheduled to receive its first 787 in September, after the aircraft underwent service-readiness operational validation tests in Japan in July.

ANA initially said it expected 12 787s by the end of the fiscal year ending on 31 March 2012, with 10 more in the following fiscal year. However, this has been cut to a total of 20 aircraft.

“There was a great deal of frustration as our fleet plan has been forced to change for three years. But there would have been a bigger impact if we did not do anything at all – we modified our fleet plan and did not let the delay distort our business,” Ito says. “As we say, a more difficult delivery can only make the baby more precious and adorable. We are now going to get the 787 and have more expectation than anything else, we can now do whatever we wanted to do three years ago.”

AIRCRAFT SELECTION

The American airframer has supplied 80% of the aircraft in ANA’s fleet, but it should not naturally expect to remain at the forefront in the future, Ito says.

“The selection of an aircraft is a very important decision. It depends on the market that we are going to serve and the environment that we are in at the time of the agreement. We look at the aircraft very seriously in terms of technology, profitability and everything else. It is not about Boeing or Airbus. We make decisions on the basis of the type of aircraft that we need at the time of purchase, not the supplier.”

In the coming years, ANA will need to start replacing some of its Boeing 777s – the backbone of its long-range fleet. While Ito says the Airbus A350 has some overlap with the 787 “in terms of range and performance”, he says ANA has not ruled it out. “We are studying the A350 very seriously and in detail,” he adds.

Both Boeing and Airbus have been pushing their super-jumbos, the 747-8 and A380, to ANA as well. With a laugh, Ito says: “Boeing and Airbus – they come to us frequently, constantly, and ask ‘why don’t you choose this or that?’. Honestly, we are looking at the aircraft but we don’t have any plans for the introduction of these big aircraft. We have to see how they fit into the Japanese market.”

ANA also aims to grow its domestic network and make it more profitable. While it will continue operating both widebodies and narrowbodies, Ito says it ordered the Mitsubishi MRJ regional jet to fill a niche within the domestic network on routes that do not require larger aircraft.

“We have high expectations for the MRJ. We looked at similar-sized aircraft made by some other companies, verified the comparison, and decided on MRJ. This is because even though the aircraft has yet to be built, we believe that the performance is going to be quite good – much better than the others. I think the MRJ is a type of aircraft that should receive more orders from other airlines around the world,” he adds.

The international network will grow in partnership with Star Alliance members. Since April, the airline has been operating transpacific flights in a joint venture with United and Continental, and it expects to start something similar with Lufthansa for flights to Europe this autumn. These would enable the airline to save operational and marketing costs, and benefit from the economies of scale.

“Although we saw a decline in demand post-earthquake, the international transpacific flights are doing rather well and this is probably due to the impact of the joint venture. We expect it to be similar with Lufthansa for flights to Europe,” Ito says.

LOW-COST LAUNCH

Moving away from its comfort zone, ANA announced the formation of Peach Aviation, a joint venture with Hong Kong-based partners that will begin low-cost flights out of Osaka’s Kansai airport next year. After this interview was conducted, ANA concluded a partnership with Malaysia’s AirAsia to start LCC services out of Narita airport.

“The Japanese government is promoting more LCCs to Japan, and the environment is getting better. Kansai airport and other airports are building budget terminals, and there are more and more LCCs from other countries flying into Japanese cities.

A Japan-based LCC should be able to compete against other modes of transportation such as railway and bus. There is huge demand from travellers who use those,” he adds.

The biggest obstacle remains Japan’s high cost-structure, which a low-cost carrier must overcome if it wants to compete more effectively. Ito says there is enough demand to overcome the barrier, pointing out that Kansai itself has a population base of about 20 million. “There are challenges, but the possibilities are not small,” he says. ANA, however, will retain its focus on the full-service market, Ito reiterates. It will use the 787 for point-to-point connections on routes to North America, Europe and India, and also leverage on the joint ventures to grow its European and American network. The focus, increasingly, will also be on Asia.

“Here, the joint ventures also come into play. North American customers can connect to our Asian destinations in Narita, which will be the focus of our hub-and-spoke network. Haneda will be used for the time-restricted long-haul slots that are not available from Narita. We can also attract business travel market from growing neighbours, especially China. We call this the dual-hub strategy,” Ito says.

ANA is also focusing on the softer side of the industry – improving service all round, marketing the brand more aggressively in Japan and regionally, and making the airline a “household name”. The airline, he says, should not only have efficient operations but be able to notch up top marks in “customer satisfaction”.

“We would like to make sure our 33,000 employees firmly share these values. Yes, there are obstacles and the environment is quite tough. But once we get over these, we will continue to grow and become the number one airline in Asia,” he says.

In Pictures: All Nippon Airways